Jeff Judy

Jeff's Thoughts - October 13 , 2010

How to Make a Boring Topic Way Too Lively

Documentation! Processing paperwork! Is that what excites you about working in banking?

Probably not. But even if you always thought of documentation as a boring subject, the press doesn't consider it the least bit boring these days. Attorneys general in quite a few states find documentation very interesting indeed, and it is also getting some attention at the federal level.

As you know, many institutions have halted foreclosure proceedings as questions have been raised about how they handled the paperwork. Far from being a "mere detail," how banks handle the paperwork reveals a lot about management's values, their priorities, and the cultures they have nurtured.

After all, this is not an issue with a few "rogue" staff members. The breadth of the problem, across many institutions and across the country, is way beyond what a few bad actors on the front lines could produce.

When the housing market was good and the economy still strong, management at many, many banks made it clear that they didn't want to be left behind in the mortgage "gold rush." Booking as much business, as fast as possible, was the focus. Staffing models beefed up "input," the sales and booking side of the mortgage business, without a corresponding increase in the staff needed to process all the documents and manage all the procedures that followed each mortgage added to the portfolio.

The result? Credit files that are missing key documents and signatures. And as banks rushed to package and sell these mortgages, they created faulty paper trails that now leave some institutions having to prove they actually hold the mortgages that are the basis of their foreclosure procedures -- procedures that were often initiated, it appears, without proper review of the documents.

The priorities, then, were clear to the front lines who were pulling in these mortgages, and to the staff who were expected to move them along as quickly as possible. But those priorities were set higher up in the organization, to be sure. And they were reinforced by staffing decisions, and by the rewards and punishments handed out along the way. How many institutions praised and rewarded employees in loan administration for their diligence, especially if it slowed down the whole "book 'em - package 'em - sell 'em" process?

When the tide turned, many in our industry simply compounded their mistakes. When it became obvious that defaults would spike, they hastily added the "foreclose 'em" step to the process, overlooking the fact that they needed to staff up to handle that level of paperwork. Enter the "robosigner," and right behind, states charging some institutions with fraud!

I imagine that all of these institutions paid excellent lip service to proper processing, diligent application of procedures, and all the rest. I also suspect that if you stepped back and looked at what they were doing, you would have seen several clear symptoms pointing to what was to come:

Staffing Imbalance: the staff devoted to administration of these credits was woefully inadequate, compared to all the employees working at bringing in more credit business.

Lack of Systems/Weak Consequences: when a credit file was incomplete, or processing delayed, internal systems and processes made it very easy to overlook or override any problems. There was no difference in what happened to a mortgage that had all its paperwork in order, compared to one that had major flaws in its documentation.

Shoot the Messenger: those who pointed out the problems that are now coming to light were not considered "team players." Employees quickly learned that their supervisors did not want to be bothered with a lot of "grumbling" about the way things were being done.

"Risk is Later" Thinking: since the housing market was great, who would ever really need that paperwork? What were the chances of a housing collapse, massive unemployment, widespread default, and pervasive documentation errors that would result in legal action and stop the foreclosure process?

Meanwhile, the entire industry gets another black eye in the media. No matter how impeccable your own practices, you have to accept the fact that your public image and the trust of your customers are affected by negative press coverage on this scale.

We are in the risk management business. Make sure your risk management practices are complete and real. Back up your values with systems, people, processes, and consequences. The time for "going through the motions," if ever there was one, is long past.